1. Are the following five statements True, False or Ambiguous? Provide a short justification for your...
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1. Are the following five statements True, False or Ambiguous? Provide a short justification for your answer. (You will be evaluated based mostly on your justification.) (a) Suppose that there are only two assets in the economy. The utility of an agent who has mean variance preferences increases as the correlation between the two assets decreases. (b) The CAPM implies that assets with the same expected return share the same covari- ance with the market. EC3330 (c) Suppose that the risk-free rate is 3%, the expected market return is 15%, and the standard deviation of the market return is 20%. Based on CAPM, an investor should not invest any positive amount in an asset that has an expected return of 12% and a standard deviation of 25%. For parts d) and e) of question 1, suppose that portfolios A, B, and C, are among the existing assets available, and they have the following expected returns and standard deviations: HA σ A = 6%, B = 16%, c = 12% 0%, OB = 15%, c = 30% 1 The correlation coefficient between assets B and C is: PB,C = 0.4 (Question 1 continued overleaf) (d) Portfolios A and B are on the efficient frontier, but Portfolio C is definitely not on it. (e) Portfolio A is on the efficient frontier, Portfolios B and C are definitely not on it. 1. Are the following five statements True, False or Ambiguous? Provide a short justification for your answer. (You will be evaluated based mostly on your justification.) (a) Suppose that there are only two assets in the economy. The utility of an agent who has mean variance preferences increases as the correlation between the two assets decreases. (b) The CAPM implies that assets with the same expected return share the same covari- ance with the market. EC3330 (c) Suppose that the risk-free rate is 3%, the expected market return is 15%, and the standard deviation of the market return is 20%. Based on CAPM, an investor should not invest any positive amount in an asset that has an expected return of 12% and a standard deviation of 25%. For parts d) and e) of question 1, suppose that portfolios A, B, and C, are among the existing assets available, and they have the following expected returns and standard deviations: HA σ A = 6%, B = 16%, c = 12% 0%, OB = 15%, c = 30% 1 The correlation coefficient between assets B and C is: PB,C = 0.4 (Question 1 continued overleaf) (d) Portfolios A and B are on the efficient frontier, but Portfolio C is definitely not on it. (e) Portfolio A is on the efficient frontier, Portfolios B and C are definitely not on it.
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